Stagflation worries rise.

Over the past couple of weeks, the term stagflation has been popping up a lot. The United States experienced stagflation, which is a combination of high inflation, slow economic growth, and high unemployment, during the 1970s. The possibility of another round of stagflation is concerning because it’s difficult to fix, explained Denny Center Student Fellow Ian Stubbs at Georgetown Law.

Oil shocks and stagflation

In the 1970s, two oil shocks occurred as the Organization of Petroleum Exporting Countries (OPEC) cut oil production and sharply curtailed exports, reported Greg Myre of NPR.

The shortages pushed inflation higher, increasing the costs of goods and services. The United States economy moved into recession and unemployment rose. Normally, inflation moves lower during recessions, but at that time, prices moved higher alongside the price of oil. By 1979, inflation was 9 percent a year. The term “stagflation” was used to describe the combination of high inflation and slow economic growth, according to Bill Medley of the Federal Reserve (Fed).

The cure is as bad as the affliction

During the 1970s, the U.S. government and the Fed tried a variety of tactics to end stagflation. Nothing worked. In the late 1970s, Paul Volcker was appointed to chair the Federal Reserve. Under his leadership, the central bank took a different approach. It raised the federal funds rate to “a record high of 20 percent in late 1980. Inflation peaked at 11.6 percent in March of the same year,” reported Medley.

In October 1981, some U.S. homebuyers paid a mortgage rate of 18.63 percent, reported Erika Giovanetti of U.S. News & World Report.

Neither the American people nor the government was happy, and there were many protests.However, “inflation began to decline, falling to 6.1 percent in early 1982 and then to 3.7 percent in the following year. The unemployment rate hit a peak of 10.8 percent in late 1982 before beginning a steady decline.”

Are we headed into stagflation?

Last week, as oil prices spiked and fell and spiked again, there was discussion about whether the United States is, once more, facing the threat of stagflation. Jeff Cox of CNBC explained:

“For most economists and Wall Street strategists, the primary factor this time is duration. If the Iran situation can be resolved in a few weeks, as President Donald Trump has promised, any stagflationary shock likely will be muted.”

Last week, major U.S. stock indexes moved lower,while yields on U.S. Treasuries with longer maturities moved higher.

VOLATILITY IS UNCOMFORTABLE BUT NOT UNEXPECTED. If you’ve ever walked down a city street on a gusty day, you may have been beset by a whirlwind of dirt and debris that stops you in your tracks. The haze and flying grit make it hard to see where you’re going. But if you’re patient and wait it out, the wind dies down, and you can continue on your way.

Recently, investors have been engulfed in a whirlwind of market volatility. News about wars, the economy, artificial intelligence (AI), and tariffs have created tremendous uncertainty – and lots of volatility. While short-term ups and downs are quite uncomfortable, they’re not unexpected when investing. See what you know about market volatility and investing by taking this brief quiz.

1. When stock prices are gyrating and you’re feeling anxious, which of the following could prove to be most valuable to you as an investor?
   1. A financial news app
   2. A popular pundit’s prediction about where markets will go next
   3. A financial plan that aligns with your short- and long-term financial goals
   4. A friend who has lots of stories about investment successes
2. People are not always perfectly rational. Adam Hayes of Investopedia reports that, sometimes, investors give more weight to recent events than they should. As a result, they make short-term decisions – like selling stocks at a low during a period of market volatility – that can negatively affect their long-term financial plans. What is this type of decision-making behavior called?
   1. Hindsight bias
   2. Recency bias
   3. Overconfidence
   4. Herd behavior
3. If an investor’s long-term goals have not changed, what should they do during periods of market volatility?
   1. Sell everything and wait for markets to calm down
   2. Check stock prices every three to four hours
   3. Talk with a financial professional and reach a thoughtful decision about whether to take any action
   4. Try to time the market by buying and selling at just the right moments
4. A portfolio is well diversified when it includes a wide variety of investments (such as stocks, bonds, cash, and other types of assets) that respond differently to market conditions, reported Troy Segal of Investopedia. In addition, portfolios may be diversified by geographic region, industry, and other factors. Why is it important to have a well-diversified portfolio?
   1. Diversification can help manage portfolio risk
   2. Diversification guarantees higher returns
   3. Diversification eliminates all losses
   4. Diversification ensures investors outperform the market

During periods of market volatility, it’s important to remember that we’ve seen the Standard & Poor’s 500 and other stock indexes decline before. Historically, they’ve recovered and moved higher. During periods of volatility and market downturns, a prudent approach is to remain patient, stay disciplined, and focus on your long-term goals.

Answers:

1. C. During periods of volatility, having a financial plan can help investors stay focused on long-term goals and avoid emotional decision-making, according to research conducted by Margaretha Dasinapa of Airlangga University. 
2. B.Recency bias causes people to place too much emphasis on recent events. As a result, they overestimate the likelihood that those events will continue or occur again.
3. C. Philip Straehl of Morningstar pointed out that many investors like to meet with their financial professionals during periods of market volatility to discuss whether any action is necessary.
4. A. Diversification can help manage portfolio risk. It does not guarantee higher returns, eliminate losses, or ensure investors outperform the market.

“Fear is often our immediate response to uncertainty. There’s nothing wrong with experiencing fear. The key is not to get stuck in it.” ― Gabrielle Bernstein, Author

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